One industry expert called the Alt-A market “wambly”*, and rumors are rampant about warehouse lenders putting restrictions on originators selling loans to companies like American Home and Indy Mac. Last week we had Wells Fargo shutting its nonprime wholesale lending business, laying off 144 workers and reassigning another 70, but will continue to originate subprime loans directly to consumers through its retail channel. Countrywide had their third straight quarterly decline in earnings. HSBC announced that it is bracing itself against $9 billion in adjustable-rate mortgages that are about to reset and earlier this year upped its loan-loss reserves by $1.7 billion to cover exposure to the subprime mortgage market. IndyMac, rumored to be the target of warehouse lender restrictions, said it was "likely there will be some further staffing realignment later this year and into 2008 (after laying off 400 employees a few weeks ago). GMAC Financial Services said second-quarter profits fell 63%, and blamed the drop on losses in its Residential Capital LLC home lending unit. The unit lost $254 million during the second quarter versus a profit of $548 million a year earlier. GMAC's exposure to the subprime mortgage market caused the company to post a $305 million net loss during this year's first quarter, including a $910 million loss at the ResCap unit. Don’t shoot the messenger…

Credit (borrowing) has become scarcer, rather than simply more expensive, which could affect the real economy in at least three ways. It could make the already large overhang of unoccupied housing worse, curb consumer spending, and constrain capital spending and hiring by firms that depend on external financing. And then what? Will this housing problem infect other parts of the economy? The “wealth effect” that housing in the past has brought us is almost gone in many parts of the country. Home equity helped the consumer stay ahead of the game but that has been stripped for the most part. The number of eligible borrowers has dropped while the amount of homes available has significantly increased. Many consumers are struggling to make ends meet especially with the cost of energy and food soaring, and if they’re spending $60 to fill up their SUV twice a week there is less money for restaurant meals or the new Sony Playstation.

We had a series of economic news releases out this morning. Personal Income was +.4%, Personal Consumption was +.1%, the PCE Deflator was +.1%, and the Employment Cost Index was +.9%. Ahead of us we still have July’s Consumer Confidence (expected to rise slightly to 105.0) and the Chicago Purchasing Manager’s Index (expected to fall to 58.4 from June’s level of 60.2). So far this morning the 10-yr stands at 4.82% and 30-yr A-paper mortgage prices are worse by about .125.

Sally was driving home from one of her business trips in Northern Arizona when she saw an elderly Navajo woman walking on the side of the road. As the trip was a long and quiet one, she stopped the car and asked the Navajo woman if she would like a ride. With a silent nod of thanks, the woman got into the car. 

Resuming the journey, Sally tried in vain to make a bit of small talk with the Navajo woman. The old woman just sat silently, looking intently at everything she saw, studying every little detail, until she noticed a brown bag on the seat next to Sally. 
"What in bag?" asked the old woman. 
Sally looked down at the brown bag and said, "It's a bottle of wine. I got it for my husband." 
The Navajo woman was silent for another moment or two. 
Then speaking with the quiet wisdom of an elder, she said: "Good trade....."

* A technical term of unknown meaning or origin.